Reverb scores a rock-star round of funding

David Kalt is upping the ante in his bid to unseat eBay as the place where music gear changes hands on the Internet.

Reverb, Kalt’s Chicago-based online marketplace for new, used and vintage instruments and music gear, is set to announce a $2.3 million Series A round of financing Tuesday. The 32 investors include Rick Nielsen of Cheap Trick, David Lowery of Cracker/Camper Van Beethoven, and Lightbank, the fund run by Groupon founders Eric Lefkofsky and Brad Keywell.

Kalt, who co-founded optionsXpress and made a fortune when Schwab bought it for $1 billion, acknowledges he could have financed this round himself. But he says he likes working with partners — and it doesn’t hurt that a handful of them have names that get noticed. Kalt’s hoping news of the growth funding snags him some of the city’s elite tech talent.

“I am competing for talent,” he says. “I come with a lean startup philosophy. I don’t want to throw a lot of money and people at this. I want to throw the right people at it.”

Reverb is designed to attract users with lower fees and a focus only on music gear. The company takes a 3.5 percent cut of the final sale price of an instrument or piece of gear — up to $350 — versus the 10 to 12 percent taken by eBay on instruments, Kalt says.

He estimates the market for new and used instruments at $7 billion annually, a slice of which Kalt captures at his Chicago Music Exchange, a lavish showroom of new and vintage instruments on Lincoln Avenue. However, he estimates there’s up to $100 billion in unused instruments “sitting around in people’s houses” on top of the more than $500 million worth changing hands each year on eBay. Reverb, he says, seeks to address “inefficiencies and friction” in the secondary market through its reduced fee structure and custom price guide, which he says helps buyers and sellers make more informed decisions about an instrument’s value.

He likens Reverb to the Merc or the NYSE, marketplaces that “establish integrity and accountability as well as liquidity” — buyers and sellers — in one place for those seeking the best gear.

“The element that makes the marketplace successful is that liquidity,” he says. “That’s the hardest part that takes the longest to establish. That was built into the launch of Reverb. With the CME, we primed the pump, so to speak. Anytime an instrument went up, we were making offers.”

The site launched in January with a $500,000 seed investment from Kalt and now boasts 45,000 users, with 20,000 listings and 4,100 active sellers. Volume on the site is growing at a pace of 30 to 40 percent a month, essentially doubling every three months, he says. Kalt declined to be more specific about revenue, though he projects Reverb will yield $14 million to $20 million in transactions in 2014.